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Corresponding Author:
Wissem Boukraine, Faculty of Economic Science and Management of Tunis, University of Tunis El Manar, Tunisia

Coauthors:
Hella Guerchi Mehri, Faculty of Economic Science and Management of Tunis, University of Tunis El Manar, Tunisia

Should Tunisian Optimal Monetary Policy React to Wage Inflation? Evidence from a DSGE Model with Labor Market Frictions

Volume 75 - Issue 1, February 2022
(pp. 29-50)
JEL classification: E24, E47, E58
Keywords: DSGE, Optimal Monetary Policy, Unemployment, Wage Inflation, Tunisia

Abstract

The aim of this paper is to determine the Tunisian optimal monetary policy response in presence of labor market frictions. Our analysis is based on a dynamic stochastic general equilibrium approach with both nominal and real rigidities. We suppose the existence of high wage mark-up and simulate scenarios related to the central bank response to a supply shock for different inverse Frisch elasticity of labor supply. Our findings suggest that the reaction to inflation alone by the Tunisian central bank, following its mandate, leads to higher welfare loss in the presence of labor market frictions. The policy recommendations we derive from our results is the inevitability of recognizing the existence of labor market frictions by the Tunisian central bank models. As well as the necessity of a monetary policy reaction that takes into account such a phenomenon by reacting not only to inflation but also to output gap and wage inflation in order to reduce inflation persistence, unemployment and stabilize production.


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Institute for International Economics
of the Genoa Chamber of Commerce


Istituto di Economia Internazionale
Camera di Commercio di Genova
Via Garibaldi, 4 (III piano) - 16124 Genova (Italy)
www.ge.camcom.gov.it